CFA: filling a real estate gap

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Why CFOs should stop mistrusting hedge funds

Hedge fund CFA is opening its doors to investors in December, and will be aiming to fill a gap in the US real estate financing market. Unlike most real estate hedge funds, which offer commercial lending on large buildings, CFA lends to small developers that might have only two to six projects under way.

“The developer may be building condos, for example, and have put $5 million of his own money into the project, but now needs $2 million to finish it over the last six to nine months, and he needs it quickly so he can keep his men on the job,” explains Ken Calligar, adviser to CFA. The developer could go to a broker who will look for suitable investors such as high-net-worth individuals or small pension funds with free capital, but this can often be time consuming. “Brokers can see commercial lending opportunities of $50 million to $100 million each month, but finding funds quickly can be difficult,” says Calligar. CFA intends to build up a pool of $500 million to be able to meet brokers’ demands quickly. “Essentially we are providing a bridge loan,” says Calligar. “The developer needs the money quickly and for a short time only, and so is insensitive to the coupon he is paying.”

Convenience

CFA charges an annual coupon of about 12%, with 4% in additional fees, all taken upfront. “So that if we are lending $1 million, the borrower receives $840,000. They understand that they are paying a lot, but they are paying for convenience.”

Calligar emphasizes that the risk profile is relatively low. CFA only lends to high-quality property developers, and having taken the money into escrow, their payment history has been highly consistent. The fund has brokered about 75 loans since March 2003, none of which has gone into foreclosure.

CFA also has the opportunity to earn additional returns through the syndication of these loans to outside investors. CFA estimates returns to investors in the mid-teens.

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CFA: filling a real estate gap

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